Berlusconi resignation adds to debt drama

@CNNMoney November 8, 2011: 3:12 PM ET
People stand next to an Athens newsstand viewing newspaper bearing headlines on Greece's sovereign debt crisis.

People stand next to an Athens newsstand viewing newspaper bearing headlines on Greece's sovereign debt crisis.

NEW YORK (CNNMoney) -- Italian Prime Minister Silvio Berlusconi agreed to resign Tuesday, adding to the drama surrounding Greek and Italian sovereign debt issues.

Berlusconi's announcement came just hours after the Italian parliament reluctantly passed a budget reform measure with virtually all lawmakers present voting for the measure. But a majority of the 630 lawmakers abstained from the vote to show their unhappiness with the government.

If the measure had failed European support for Italy's sovereign debt could have vanished, causing an immediate crisis in the eurozone's third-largest economy. But the loss of a majority was enough to force Berlusconi's hand.

His departure could come as late as the first week of December, after a final vote on the budget. But he could be forced out sooner if investors drive up the interest rates on Italian bonds before then.

"The hope will be that Italy can quickly gain a new government with the stomach and the ability to implement major structural reforms," said Ben May, European economist with Capital Economics, in a client note. "But this alone will not solve Italy's woes."

Yields on Italy's 10-year notes, which have been well above 6% this week, shot back to close at 6.77%, with the spread to German debt increasing to a record of just under 5 percentage points. And stocks still struggled to maintain earlier gains in both Europe and the United States.

Italy's problems are bigger than Berlusconi

The situation in Greece also is still not resolved, as political leaders there struggled to form a coalition government in the wake of Prime Minister George Papandreou's resignation announcement Sunday.

Papandreou had announced he would step down in a bid to save the European bailout deal for Greece reached at the end of last month. European finance ministers, who met Monday to discuss the Greek and Italian situations, said the move was an important step to keeping the bailout deal on track.

"We welcome the intention of Greece to form a national unity government," said Luxembourg Finance Minister Jean-Claude Juncker, who leads the group of eurozone finance ministers, in a late-night statement Monday. "We underlined the importance of sustained cross-party support for the program in Greece."

The finance ministers called on leaders of both major Greek political parties to issue a letter reaffirming their commitment to the deal, which includes new taxes and budget cuts in return for additional European cash and forgiveness of half the value of Greek debt by banks holding the notes.

Juncker said that executives of the so-called troika, the European Central Bank, the International Monetary Fund and the European Union, were set to return to Athens as soon as the new Greek government was in place. That means Greece could get the money it needs to avoid default by the end of the year.

The debt crisis and the impact it's had on the global financial system is being closely watched by investors and policymakers around the globe.

Mark Carney, the head of Canada's central bank, warned Tuesday that the global financial system is at risk of a new liquidity crisis due to European banks having to deleverage in response to sovereign debt problems.

"We are on the cusp of another retrenchment," he said in a speech in London. "There are steps that can be taken to mitigate, but not eliminate, the negative effects of the current wave. How European banks choose to delever will determine which ones authorities around the world need to take."

Carney was appointed last week as chairman of the Financial Stability Board, which has been charged by the G20 to coordinate global financial reform and monitor progress. To top of page

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